The Robinson-Patman Price Discrimination Act, 15 USC §13(a), generally makes it unlawful for one engaged in commerce to discriminate in price between different purchasers of like commodities where, among other things, “the effect of such discrimination may be substantially to lessen competition.” Abbott Laboratories v. Portland Retail Druggists Association, 425 U.S. 1, 3-4, 47 L. Ed. 2d 537, 543 (1976). This United States law essentially prevents pharmaceutical sellers from selling a given type of pharmaceutical at regular price to one buyer and then selling that same type of pharmaceutical at a discounted price to another buyer. However, an exception to the Robinson-Patman Act exists stating that “nothing in the [Robinson-Patman Act], shall apply to purchases of their supplies for their own use by schools, colleges, universities, public libraries, churches, hospitals, and charitable institutions not operated for profit.” 15 USC §13c. Because of this exception, hospitals, nursing homes, long term health care facilities, and the like are eligible for purchasing pharmaceuticals at a discounted price—an “own use” discount—when they are buying pharmaceuticals on behalf of their patients or in some situations, their employees. Therefore, when nursing homes purchase pharmaceuticals on behalf of their patients, they are eligible to purchase such pharmaceuticals from the pharmaceutical manufacturer at a discounted price.
However, nursing homes, as with most other pharmaceutical buyers, do not buy their pharmaceuticals directly from the pharmaceutical manufacturer. Rather, they purchase their pharmaceuticals through a distributor who buys large quantities of pharmaceuticals, stores those large quantities, and distributes them to various buyers upon request. Pharmaceutical sellers are reluctant to sell discounted pharmaceuticals to distributors because of a fear that the distributor will buy more discounted pharmaceuticals than necessary to supply the distributor's “own use”-eligible customers, and then sell the surplus to customers not eligible for an “own use” discount (thereby pocketing fraudulently-obtained profits). Pharmaceutical manufacturers call this practice “diversion” and understandably dislike it.
One system currently in place that is used by pharmaceutical manufacturers to prevent “diversion” of “own use” discount pharmaceuticals is a “chargeback” or “rebate” system. See In re Brand Name Prescription Drugs Antitrust Litigation, 186 F.3d 781, 783-4 (7th Cir. 1999). In this chargeback/rebate system, the pharmaceutical manufacturer sells pharmaceuticals to a distributor at a regular price. The pharmaceutical manufacturer then contracts directly with “own use”-eligible buyers for a discounted price. If the “own use”-eligible buyer then buys pharmaceuticals from a distributor at that discounted price, the pharmaceutical manufacturer will reimburse the distributor (provide a rebate) for the difference between the regular price and the discounted price. To obtain this rebate, the distributor must make a representation to the pharmaceutical manufacturer that the discount was given to the “own use”-eligible buyer. FIG. 1 depicts a diagram for this chargeback system. The chargeback or rebate system obviously requires both the manufacturer and the distributor to maintain a dual set of accounting and disbursement records which results in increased overhead for both parties. The rebate system is designed primarily around “own use” purchasers such as hospital pharmacies, closed pharmacies, and health maintenance organizations. Because of the single, non-retail focus of these organizations, manufacturers and distributors assume that their orders of pharmaceuticals are true “own use” orders. However, the opportunity for diversion does exist as many of these purchasers, such as hospitals and HMOs have retail pharmacy outlets where “own use” pharmaceuticals could be directed, and the rebate system provides virtually no policing to determine whether or not the diversion actually occurs.
Currently, in the United States, according to a report by the SMG Marketing Group of Chicago, Ill., approximately 55% of nursing homes purchase their pharmaceuticals from “closed pharmacies.” A closed pharmacy is a pharmacy that supplies pharmaceuticals to institutions such as hospitals or nursing homes, but does not sell pharmaceuticals to walk-in customers. Because these closed pharmacies have an exclusive customer list of customers who are eligible to buy pharmaceuticals at an “own use” discount, pharmaceutical manufacturers are willing to sell pharmaceuticals to these closed pharmacies at a discounted price. That is, pharmaceutical manufacturers are not overly worried that the “closed pharmacy” will sell discounted pharmaceuticals at a regular price to customers ineligible for a discount, because the “closed pharmacy” has virtually no such customers.
However, approximately 45% of nursing homes are served by retail pharmacies. These retail pharmacies, in addition to supplying the pharmaceutical needs of a nursing home, also supply pharmaceuticals to walk-in customers. Thus, when a retail pharmacy purchases drugs from a pharmaceutical manufacturer or a pharmaceutical distributor, the retail pharmacy may be purchasing pharmaceuticals on behalf of not only the nursing home, but also its walk-in customer trade. Because these retail pharmacies are supplying pharmaceuticals to walk-in customers as well as nursing homes, pharmaceutical manufacturers have been unwilling to sell “own use” discount pharmaceuticals to such retail pharmacies for fear of diversion. That is, the pharmaceutical manufacturer is afraid that the retail pharmacy will commingle its “own use” discount pharmaceuticals with its walk-in customer pharmaceuticals. To date, retail pharmacies have been unable to obtain “own use” discounts when buying pharmaceuticals on behalf of nursing homes. As a result, some 7,648 nursing homes (approximately 45% of all nursing homes) pay more money than necessary when purchasing pharmaceuticals.
Not helping the retail pharmacy in this quest for an “own use” discount on pharmaceuticals purchased on behalf of a nursing home is the limited market power that each individual retail pharmacy possesses in relation to the pharmaceutical manufacturer. To improve their buying power, retail pharmacies have banded together to form buying groups, or buyers co-ops. These buyers co-ops can amass several orders from each retail pharmacy which belongs to the buyers co-op. Armed with a large order for a given type of pharmaceutical, the buyers co-op has some negotiation power with the pharmaceutical manufacturer to obtain a discounted price. However, before the pharmaceutical manufacturer is willing to sell these pharmaceuticals at a discounted price, the pharmaceutical seller still needs assurances that such discounted pharmaceuticals are actually being used by institutions eligible for an “own use” discount. Because no system currently in place has adequately assured pharmaceutical manufacturers that the buyers co-ops or retail pharmacies are not diverting “own use” discounted pharmaceuticals, nursing homes that are supplied with pharmaceuticals by a retail pharmacy continue to be unable to purchase “own use” discount pharmaceuticals. This inability to purchase discounted pharmaceuticals leads to nursing homes having higher operational costs, costs which are passed down to nursing home residents who end up paying a higher price than necessary to reside in such nursing homes.